February 24, 2022
A look at PSD2’s tomorrow
PSD2morrow: Plaid’s monthly blog series where we look at the PSD2 review, what TPPs need, and where we see room for growth.
The European Commission has begun its review of PSD2 with an academic study, and there are several changes we’d like to see in the next iteration of this legislation. We need a broad, transparent and collaborative piece of legislation that fits market needs. We’ll use this blog series to answer questions from the review.
PSD2 in review
First things first: PSD2 is a solid and comprehensive piece of legislation that has opened up the financial sector, increased competition, and provided better consumer outcomes through choice and user experience, as well as new and safer ways to pay. Built on financial data, PSD2 provides better insights into behaviours and transactions, allowing millions of us to better understand our financial lives. There’s a growing market offering more and more consumer choice, and with the rapid levels of digital adoption across all forms of financial services, we only expect for this to continue to grow.
In its first stage, PSD2-enabled open banking focused heavily on providing users access to their financial data, allowing them to grant access to a third party for their benefit. As the market continues to evolve, financial data, payments and their related data will meld together into information that empowers a new kind of consumer and a new kind of merchant, empowered by millions of data points and instant payment solutions.
Although PSD2 is a strong foundation - it’s not perfect
There’s ample room for improvement to better enable a competitive ecosystem that puts consumers first. Some of the key areas we will focus on include:
Broadening the scope of PSD2. At a high level - the scope of PSD2 is too limited to be truly fit for purpose in an open finance future. Payment accounts just aren’t enough to fully enable the ecosystem.
Aligning incentives across the ecosystem.Banks and intermediaries have misaligned incentives as formal participants in the open banking landscape. PSD2 pits open banking players and banks against each other, and this needs to change. Banks need a commercially viable role in the ecosystem, but they also need to commit to more robustly honouring their responsibilities under the law. TPPs like Plaid provide a broad and central role in the open banking ecosystem, but between technical capabilities and licensing/compliance requirements, we sometimes find ourselves, like all our peers, facing difficult tradeoffs between UX, the quality of our service and regulatory requirements that don’t always feel proportionate. We’re working on resolutions through market led schemes such as the European Payments Council’s SPAA MSG, which offer ways to resolve these concerns and work more collaboratively with banks.
Strengthening enforcement powers. One of the consequences of misaligned incentives is the need for stronger enforcement, which is embedded in the legislative text and not subject to EBA interpretation. TPPs and open banking participants need to be able to rely on national competent authorities to adequately monitor and enforce rules around payment services and be diligent about issuing disciplinary action in the face of non-compliance.
The supervision and implementation of PSD2/3. In order to introduce greater competition in the market we need a supervisory authority with increased competition as one of its guiding mandates, and that is impartial to the different types of financial services players in the market.
So with all this in mind, let’s explore this month’s question – what are the noticeable socio-economic costs/benefits from PSD2?
Open banking has enabled many societal benefits over the last few years. Firstly, a new bank-to-bank payment option as introduced by payment initiation services allows users to pay from current accounts more easily, and also reduces issues associated with merchant acceptance of certain card schemes, as well as lowering reliance on credit cards. A new way to pay that is separate to cards also allows for a higher rate of participation in e-commerce, thus stimulating digital economic growth - with the global open banking market generating 7.29 billion USD in 2018 - and expected to generate 43.15 Billion USD by 2026.
Open banking has a very favourable outcome for one socio-economic group in particular - the financially underserved. PSD2 also puts consumers in control of their payments data - leading to better individual financial decisions and societal understanding of financial services because this previously unexploited data can now help a user understand financial behaviors and patterns, and help nudge them towards more favourable outcomes. For instance, according to a recent McKinsey study, 40% of consumers who worry about job security would use an app that helps them save automatically or gives them a clearer understanding of their finances. The use of this data is also favourable socio-economically as it can provide a good alternative basis for scoring / applicability matrices.
Have a question you’d like our policy team to answer? Contact firstname.lastname@example.org and we’ll feature the answer in next month’s PSD2morrow. Also, contact Plaid to learn how we can support your open banking initiatives.